What is the most simple/efficient way to accomplish this trade?

[talontrading]

Ah.. I see.

OP:

Option A
1) Buy 1 90 Put
2) Sell 1 80 Put

Both expire at the same time (the time you are targeting for your trade.)

Option B
1) Buy 1 90 Put that expires 1.5 - 2 years from now.
2) Sell up to twice that many 90 Puts that expire sooner. When they expire, you may sell more. If you sell more than you bought you are exposed to a large price decline so you would have to adjust the trade if that happens. On the other hand, you may profit from this trade even if your original trade idea is wrong.

If your target is the 80's you want to be long a put with a higher strike unless you are planning on covering on a meltdown when the vol will spike. you also could finance this by selling calls that expire at the same time, but there are many reasons why i wouldnt suggest that.

i'm not a fan of strategies like this that target a specific price at a specific time... that's a really difficult trade. just because it can be done with options doesn't mean it's a good idea.

all things considered, if you're asking this question in an internet forum, i would think option A is your best bet. simple and not too costly and not a lot that can go wrong.

in general, people are too afraid to sell options... keep that in mind. professionals tend to be net sellers for the most part....

Quote from nazzdack:

1) Replace "ratio-put-spread" with "put-backspread" to make better sense of it.
2) To focus on strategies that emphasize the 80 strike price all have merit.

 

[spindr0]

Quote from talontrading:

Option A

1) Buy 1 90 Put
2) Sell 1 80 Put

Both expire at the same time (the time you are targeting for your trade.)

If the drop occurs a well before expiration, the short leg of the vertical sucks out a ton of premium gain and most of any IV expansion. You'd think that the spread would be highly profitable but SPY at 80 in the next few months would yield less than 1/2 the spread difference.

Option B

1) Buy 1 90 Put that expires 1.5 - 2 years from now.
2) Sell up to twice that many 90 Puts that expire sooner. When they expire, you may sell more. If you sell more than you bought you are exposed to a large price decline so you would have to adjust the trade if that happens. On the other hand, you may profit from this trade even if your original trade idea is wrong.

A ratio write will be a disaster if SPY moves down sharply well before expiration and IV expansion will double the misery.

OTOH, a 2:1 year calendar (95, 90, 85) that drops close to near term expiration will outperform the vertical and large IV expansion will magnify that outperformance even more.

Round and round we go

 

[pianoman]

--------------------------------------------------------------------------------
Quote from talontrading:

Option A

1) Buy 1 90 Put
2) Sell 1 80 Put

Both expire at the same time (the time you are targeting for your trade.)

If the drop occurs a well before expiration, the short leg of the vertical sucks out a ton of premium gain and most of any IV expansion. You'd think that the spread would be highly profitable but SPY at 80 in the next few months would yield less than 1/2 the spread difference.

Option B

1) Buy 1 90 Put that expires 1.5 - 2 years from now.
2) Sell up to twice that many 90 Puts that expire sooner. When they expire, you may sell more. If you sell more than you bought you are exposed to a large price decline so you would have to adjust the trade if that happens. On the other hand, you may profit from this trade even if your original trade idea is wrong.

A ratio write will be a disaster if SPY moves down sharply well before expiration and IV expansion will double the misery.

OTOH, a 2:1 year calendar (95, 90, 85) that drops close to near term expiration will outperform the vertical and large IV expansion will magnify that outperformance even more.

Round and round we go
--------------------------------------------------------------------------------



Thanks for all the feedback. I'm still leaning towards doing a simple vertical put spread, but as Spindr0 pointed out, the problem is that it leaves out all of the IV expansion. I've looked more into the calander spread 1:1 or 2:1, but this may require more finesse and management depending on how the market moves, and can be exposed to larges losses if not properly managed.

This will be more of a position trade for my long-term account. As others have pointed out, with more active trade management, it could be more profitable, but I'd rather not make it too complicated. I'm willing commit (and lose) up to 5% of my long-term account to make this bet. I've considered trying to do this kind of trade with a 2X or 3X inverse ETF, but those have their own issues to contend with as well (decay from daily compounding).

Has anyone read the book on how John Paulson's fund made their money during the mortgage meltdown? The real beauty of their trade was that they constructed it by buying credit default swaps where the risk/return was astouding ~ 80X-100X. The cost of buying swaps on 100 million of a security was less than 1 million per year. Their funds could not have made that much money any other way (without significantly more risk of loss). Is there any similar instrument that individuals can use? Options are way too expensive!

 

[Martinghoul]

Quote from pianoman:


Has anyone read the book on how John Paulson's fund made their money during the mortgage meltdown? The real beauty of their trade was that they constructed it by buying credit default swaps where the risk/return was astouding ~ 80X-100X. The cost of buying swaps on 100 million of a security was less than 1 million per year. Their funds could not have made that much money any other way (without significantly more risk of loss). Is there any similar instrument that individuals can use? Options are way too expensive!

Paulson's performance has nothing in particular to do with the type of instruments he was using...

It had everything to do with the fact that he was able to buy options that were, in hindsight, mis-priced, i.e. he was able to buy them insanely cheaply (I hear there was a big seller in the mkt; this big insurance co, name like AEG, AYG, or something like that ).

 

[Sell 'em]

Quote from Martinghoul:

Paulson's performance has nothing in particular to do with the type of instruments he was using...

It had everything to do with the fact that he was able to buy options that were, in hindsight, mis-priced, i.e. he was able to buy them insanely cheaply (I hear there was a big seller in the mkt; this big insurance co, name like AEG, AYG, or something like that ).

Yeah, and of course everyone knew real estate never goes down, so of course the insurance was cheap. Writing those policies was like printing money for AYG ...

 

[Ghost of Cutten]

Bear put spread.

 

[Ghost of Cutten]

Quote from Martinghoul:

Paulson's performance has nothing in particular to do with the type of instruments he was using...

It had everything to do with the fact that he was able to buy options that were, in hindsight, mis-priced, i.e. he was able to buy them insanely cheaply (I hear there was a big seller in the mkt; this big insurance co, name like AEG, AYG, or something like that ).

Even if they hadn't been mis-priced, he would have made 10-20 times his money. That wouldn't have been possible with outrights.

 

[Martinghoul]

Quote from Ghost of Cutten:

Even if they hadn't been mis-priced, he would have made 10-20 times his money. That wouldn't have been possible with outrights.

Which outrights? Outright ABX? My point was not about CDS vs outright ABX, but rather CDS vs other contingent claim products, such as options.

The reason for Paulson's success was that he was able to buy massively mis-priced tails (i.e. mkt perceived them as lottery tickets) that turned out to be golden.